Opinion
No. 1 CA-CV 13-0183
06-05-2014
VALLEY OAKS FINANCIAL CORPORATION, a California corporation, Plaintiff/Appellee, v. JOHN DELL WRIGHT and NANETTE JOY WRIGHT, as individuals and husband and wife, Defendants/Appellants.
Kutak Rock, LLP, Scottsdale By Joseph Wm. Kruchek, Franci G. Fealk, Andrew J. Russell Counsel for Plaintiff/Appellee Ivy L. Kushner, Attorney at Law, Scottsdale By Ivy L. Kushner Counsel for Defendants/Appellants
NOTICE: NOT FOR PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
Appeal from the Superior Court in Maricopa County
No. CV2010-053821
The Honorable Michael R. McVey, Judge Retired
AFFIRMED
COUNSEL
Kutak Rock, LLP, Scottsdale
By Joseph Wm. Kruchek, Franci G. Fealk, Andrew J. Russell
Counsel for Plaintiff/Appellee
Ivy L. Kushner, Attorney at Law, Scottsdale
By Ivy L. Kushner
Counsel for Defendants/Appellants
MEMORANDUM DECISION
Presiding Judge Kent E. Cattani delivered the decision of the Court, in which Judge Margaret H. Downie and Judge Michael J. Brown joined. CATTANI, Judge:
¶1 John Dell Wright and Nanette Joy Wright (the "Wrights") appeal the superior court's deficiency judgment in favor of Valley Oaks Financial Corporation ("Valley Oaks"). For reasons that follow, we affirm.
FACTS AND PROCEDURAL BACKGROUND
¶2 In December 2006, Los Padres Bank agreed to advance up to $7,725,000 to the Wrights to build a residence in Scottsdale, Arizona. The Wrights executed a loan agreement and promissory note. The Wrights and Los Padres Bank subsequently entered into additional agreements that changed the terms of the transactions by (1) increasing the loan amount, (2) extending the maturity date of the loan, (3) reducing the interest rate on the loan, (4) establishing a new schedule of payments, and (5) modifying the schedule of payments for the loan.
¶3 Los Padres Bank advanced to the Wrights a total of $8,219,301.15, secured by a construction deed of trust. The transaction included the Wrights' agreement to repay all amounts loaned to them by Los Padres Bank, to satisfy all the covenants under the loan agreement and note, and to maintain and preserve the value of the collateral.
¶4 The Wrights defaulted on the loan, and Los Padres Bank sent them a written notice of default. On June 1, 2010, Los Padres Bank assigned its rights and interest under the construction deed of trust to Valley Oaks. On June 3, 2010, the Wrights' property was sold at a trustee's sale, and Valley Oaks obtained title to the property through a credit bid of $5,800,000.
¶5 On August 12, 2010, Valley Oaks filed a deficiency action against the Wrights. In an amended joint pretrial statement, the parties stated that the fair market value of the property as of the date of the trustee's sale was a contested material issue of fact that the court needed to address. The court subsequently held a fair market value hearing at which Valley Oaks introduced testimony from Robert Crawford, who was the Vice President of Pacific Western Bank and former Senior Vice President of Los Padres Bank (commercial lending division), to authenticate a document referenced as Exhibit 14, which transferred the promissory note for the property from Los Padres Bank to Valley Oaks. The document consisted of two paragraphs, specifying as follows:
On August 20, 2010, Pacific Western Bank took over Los Padres Bank through a Federal Deposit Insurance Corporation ("FDIC") - assisted transaction. Valley Oaks was a wholly-owned subsidiary of Los Padres Bank, but became a wholly-owned subsidiary of Pacific Western Bank after Pacific Western purchased Los Padres Bank and all of its assets and subsidiaries.
This instrument shall act as an endorsement by allonge of the Promissory Note dated December 15, 2006, made by John Dell Wright and Nanette Joy Wright, as "Maker", and Los Padres Bank ("Original Lender"), in the original principal amount of $7,725,000, as amended (collectively, the "Note"). The undersigned Original Lender represents and warrants that it is the sole and current holder of the Note, but otherwise makes no representation or warranties in connection with the Note.
Maker is instructed to pay all principal, interest, and other sums due under the Note to the order of Valley Oaks Financial Corporation, a California corporation ("New Lender") and its successors and assigns, all without recourse to the undersigned or the Original Lender. The undersigned Original Lender transfers and assigns to the New Lender all of its right, title, and interest in and to the Note and all documents that evidence, secure, or guaranty the loan evidenced by the Note.
¶6 During questioning, Crawford indicated that he did not know the meaning of the phrase "custodian of records." After the Wrights' counsel defined custodian of records to mean someone having the responsibility to keep all of Los Padres Bank's records and to ensure the accuracy of Los Padres Bank's records, Crawford stated that he was not the custodian.
¶7 Based on Crawford's statement, the Wrights objected to the admission of Exhibit 14 based on a lack of foundation. Valley Oaks asked the court to allow it to submit an affidavit from a custodian of records if the court were to sustain the Wrights' objection. The court sustained the objection but indicated that it would likely allow Valley Oaks to submit an affidavit establishing the foundation for Exhibit 14.
¶8 Although the Wrights had not previously challenged the amount due under the loan, during closing argument, their counsel disputed Valley Oaks' calculation of the loan deficiency. Because the parties did not agree on the total amount owed, the court stated it would permit Valley Oaks to present evidence on this issue and would give the Wrights an opportunity to respond.
¶9 The court scheduled a second evidentiary hearing for April 20, 2012 to determine the deficiency amount and requested briefing regarding several issues, including whether Valley Oaks' parent company's January 2011 issuance of a 1099-C form, labeled "Cancellation of Debt," effectively cancelled the debt and precluded Valley Oaks from maintaining this action. The day before the hearing, the parties stipulated as follows:
1. [T]he amount owed as of June 3, 2010, inclusive of accrued interest, late charges, foreclosure costs and real estate taxes, is $8,526,116.60.The court thereafter entered an order accepting the stipulation and vacating the hearing.
2. The willingness of Defendants to stipulate to the amount owed does not constitute a waiver of Defendants' objection to the Court receiving additional evidence on this issue subsequent to the closing of evidence at the February 8, 2012 hearing.
3. The parties stipulate that the April 20th 2012 hearing may be vacated.
4. The parties stipulate that the post trial briefs shall be filed simultaneously on May 4, 2012.
5. The parties stipulate that that no further evidence shall be submitted for the Court's consideration and the memoranda shall not have any additional documents appended thereto with the exception of statutes or case law.
¶10 In June 2012, Valley Oaks filed an affidavit naming Crawford as its witness to authenticate Exhibit 14. Valley Oaks subsequently renewed its request for permission to file the affidavit and asked to be allowed to withdraw from the provision in the stipulation prohibiting the submission of additional documentary evidence. Valley Oaks' counsel stated that after the fair market value hearing, she learned that Valley Oaks did not have an official custodian of records, but that Crawford was the appropriate person to testify regarding the document because he helped prepare the loan documents at issue and ensured that they were signed.
Crawford testified at the fair market value hearing that he had directed counsel to prepare Exhibit 14 to assign Los Padres Bank's rights under the promissory note to Valley Oaks.
¶11 The court permitted Valley Oaks to withdraw from the stipulation, finding that (1) although Valley Oaks had not asked the court to reopen its case-in-chief to introduce the affidavit, the failure to do so was an oversight, and (2) based on the court's review of the transcript, Crawford was confused regarding the meaning of the term "custodian of records." The court admitted Exhibit 14 into evidence, and set a status conference for the Wrights to advise the court whether they wished to withdraw their stipulation regarding the amount of indebtedness owed and have an evidentiary hearing on the issue. The court also found that Valley Oaks' parent company's issuance of a 1099-C form did not preclude Valley Oaks from pursuing this deficiency judgment, concluding that although the form created a presumption that the debt had been cancelled, Valley Oaks had rebutted the presumption and had demonstrated that it did not intend to forgive the obligation.
¶12 The Wrights filed a motion for reconsideration, in which they opposed the admission of Exhibit 14. At an August 2012 status conference, the Wrights stated that they were not seeking to withdraw from the stipulation and were not requesting an evidentiary hearing regarding the amount owed. The court denied the Wrights' motion for reconsideration and entered judgment in favor of Valley Oaks.
¶13 The Wrights timely appealed. We have jurisdiction under Article 6, Section 9, of the Arizona Constitution and Arizona Revised Statutes ("A.R.S.") sections 12-120.21(A)(1) and -2101(A)(1).
Absent material revisions after the relevant date, we cite to the current version of the statute.
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DISCUSSION
¶14 The Wrights contend that the trial court erred by (1) admitting in evidence Exhibit 14; (2) finding that the issuance of a 1099-C to the Wrights after the trustee's sale did not cancel the Wrights' debt; (3) finding that Valley Oaks had standing to bring this deficiency claim as the holder of the note; and (4) failing to find that the Wrights were entitled to judgment as a matter of law and setting a second evidentiary hearing permitting Valley Oaks to present additional evidence.
I. Admission of Exhibit 14.
¶15 We review a trial court's ruling on the admissibility of evidence for an abuse of discretion. Cal X-Tra v. W.V.S.V. Holdings, L.L.C., 229 Ariz. 377, 404, ¶ 89, 276 P.3d 11, 38 (App. 2012). The trial court has broad discretion in applying evidentiary rules to specific items of evidence. Larsen v. Decker, 196 Ariz. 239, 241, ¶ 8, 995 P.2d 281, 283 (App. 2000).
¶16 The Wrights argue that the court abused its discretion by admitting Exhibit 14 because Valley Oaks did not establish that Crawford was its custodian of records. But regardless of any confusion regarding whether Valley Oaks had a custodian of records, the trial court found that Crawford was familiar with Exhibit 14 as the bank officer who directed its preparation and execution, and he was thus qualified to authenticate it. The record supports the court's conclusion because Crawford testified that he was the bank officer who (1) originated the Wrights' construction loan by preparing the approval request and obtaining all necessary documents to close the loan; (2) reviewed all the loan documents for the Wrights' transaction; (3) closed the loan; (4) coordinated the trustee's sale of the property after the Wrights' default; (5) directed Los Padres Bank's counsel to prepare the assignment documents to transfer the promissory note and deed of trust to Valley Oaks; and (6) ensured that all documents were signed. As such, he possessed sufficient personal knowledge of Exhibit 14 for its authentication. See Ariz. R. Evid. 803(6)(D) (providing that a custodian of records "or another qualified witness" may authenticate a record of regularly conducted activity).
¶17 The Wrights also contend that the trial court abused its discretion by admitting Exhibit 14 after the parties had already stipulated that they would not submit additional evidence or append additional documents to their final argument memoranda. "A stipulation is an agreement, admission or concession made in a judicial proceeding by the parties thereto or their attorneys, in respect to some matter incident thereto, for the purpose, ordinarily, of avoiding delay, trouble and expense." Harsh Bldg. Co. v. Bialac, 22 Ariz. App. 591, 593, 529 P.2d 1185, 1187 (1975) (citation omitted). Parties are generally bound by their stipulations unless relieved of them by a court order. Id. A trial court, in its discretion, may set aside a stipulation under certain circumstances, including when the stipulation was entered into through inadvertence or excusable neglect or "where special circumstances exist rendering it unjust to enforce the stipulation." Id. at 594, 529 P.2d at 1188 (citation omitted). Here, the trial court released Valley Oaks from the stipulation after finding that Valley Oaks' failure to ask the court to reopen its case-in-chief to introduce the custodian's affidavit was likely "an oversight," and that it would be inequitable not to allow Valley Oaks to do so.
¶18 We favor deciding cases on the merits, Adams v. Valley Nat'l Bank, 139 Ariz. 340, 342, 678 P.2d 525, 527 (App. 1984), and we conclude that the court did not abuse its discretion by releasing Valley Oaks from the stipulation. The record reflects that Valley Oaks initially moved to submit an affidavit of a custodian of records, but neglected to remind the court to consider this issue during the fair market value hearing. Moreover, we note that the only significance of releasing Valley Oaks from the stipulation was that the court admitted a document, which simply confirmed Crawford's testimony that he directed the preparation of an assignment transferring Los Padres Bank's interest in the Wrights' debt to Valley Oaks. Additionally, to alleviate any potential prejudice, the court provided the Wrights an opportunity to withdraw from the stipulation and elect to have an evidentiary hearing on the issue of indebtedness, but the Wrights chose not to do so. Accordingly, we conclude that the court did not abuse its discretion by admitting Exhibit 14. See Larsen, 196 Ariz. at 241, ¶ 8, 995 P.2d at 283.
II. Issuance of For 1099-C.
¶19 In January 2011, Pacific Western Bank sent to the Wrights and filed with the IRS a 1099-C form labeled "Cancellation of Debt" and stated that the "[a]mount of debt cancelled" was $8,291,129.70. The stated date of the debt cancelation was June 3, 2010 (the date of the trustee's sale). The Wrights argue that Pacific Western Bank's issuance of this form precludes further collection of the debt.
¶20 We review a trial court's legal conclusions de novo. Castro v. Ballesteros-Suarez, 222 Ariz. 48, 52, ¶ 12, 213 P.3d 197, 201 (App. 2009). In Arizona, a lender that is entitled to enforce an instrument may discharge a debtor's obligation to pay "[b]y an intentional voluntary act, . . . or [b]y agreeing not to sue or otherwise renouncing rights against the party by a signed writing." A.R.S. § 47-3604(A)(1)-(2). The "issuance of a Form 1099-C may be prima facie evidence of cancellation of a debt, [but] the lender may rebut that evidence by showing that when it issued the form it did not intend to forgive the obligation." Amtrust Bank v. Fossett, 223 Ariz. 438, 438, ¶ 1, 224 P.3d 935, 935 (App. 2009).
¶21 To rebut the presumption that the issuance of this 1099-C indicated the bank's intention to cancel the Wrights' debt, Crawford testified that he spoke with two bank employees who had handled the issuance of the 1099-C and provided the information for its preparation. One of these employees requested for reporting purposes a list of charge-offs that Los Padres Bank had processed in 2010 up until its takeover in August 2010. This list of loans included loans for properties that had gone through trustee's sales, including the Wrights' property. The preparation of the 1099-Cs was for reporting purposes as a matter of standard bank procedure and had "nothing to do with whether or not the bank was dismissing the obligations of the borrowers at that point in time." Crawford thus testified that Valley Oaks did not intend the issuance of the 1099-C to relieve the Wrights of their obligation to pay the debt and deficiency. He further noted that "[i]f that were the case, we probably would have cancelled the deficiency suit." Crawford's testimony was sufficient to rebut a presumption that the Wrights' debt had been forgiven.
III. Standing to Bring Deficiency Action.
¶22 We will not set aside a court's findings of fact unless clearly erroneous or not supported by substantial evidence. Nordstrom, Inc. v. Maricopa County, 207 Ariz. 553, 558, ¶ 18, 88 P.3d 1165, 1170 (App. 2004). We review the court's conclusion that a party has standing to sue de novo as a question of law. Robert Schalkenbach Found. v. Lincoln Found., Inc., 208 Ariz. 176, 180, ¶ 15, 91 P.3d 1019, 1023 (App. 2004).
¶23 The Wrights argue that the trial court erred by finding that Valley Oaks had standing to maintain this deficiency action without being the holder of the note at issue. This argument fails, however, in light of our ruling that the trial court properly considered Exhibit 14, which evidences Los Padres Bank's assignment of its rights under the note, along with the deed of trust, to Valley Oaks.
¶24 Finally, the issuance of a 1099-C from Pacific Western Bank, rather than Valley Oaks as creditor following the trustee's sale, did not establish that Valley Oaks lacked standing. At the time of the trustee's sale, Valley Oaks was a wholly-owned subsidiary of Los Padres Bank. Pacific Western Bank subsequently took over Los Padres Bank in August 2010. When Pacific Western Bank purchased Los Padres Bank, it purchased all of Los Padres Bank's assets and subsidiaries, including Valley Oaks. As such, Valley Oaks became a wholly-owned subsidiary of Pacific Western Bank. Accordingly, the Wrights' reliance on the fact that the 1099-C issued to the Wrights designated Pacific Western Bank, rather than Valley Oaks, as the creditor is misplaced because the subsidiary relationship between Pacific Western Bank and Valley Oaks explains the designation.
IV. Additional Evidentiary Hearing.
¶25 The Wrights contend that the court abused its discretion by ordering an additional evidentiary hearing to consider the amount of Valley Oaks' damages after Valley Oaks did not present evidence as to the amount owed by the Wrights at the February 2012 hearing.
¶26 The February 2012 hearing was limited to determining the property's fair market value because the Wrights had not previously indicated in their pretrial statement an intent to challenge the amount owed. Upon learning that the Wrights intended to challenge the amount owed, the court ordered an additional hearing because neither party had addressed this issue during the fair market value hearing. Accordingly, the trial court did not abuse its discretion by ordering a hearing to determine the amount owed.
V. Attorney's Fees and Costs.
¶27 The Wrights have requested their attorney's fees and costs on appeal pursuant to A.R.S. § 12-341.01(A) and ARCAP 21. The Wrights are not the prevailing party on appeal, and we deny their request for attorney's fees and costs.
¶28 Valley Oaks has also requested its attorney's fees and costs pursuant to the construction loan agreement, the promissory note and its allonge, A.R.S. §§ 12-341.01(A), -341, and ARCAP 21.
¶29 When a contract contains an attorney's fees provision, we will grant fees consistent with such a provision. A. Miner Contracting, Inc. v. Toho-Tolani County Improvement Dist., 233 Ariz. 249, 261, ¶ 40, 311 P.3d 1062, 1074 (App. 2013). Here, the construction loan agreement provides for payment of attorney's fees and costs:
Borrower agrees to pay all Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement.The promissory note likewise provides that the Wrights must pay attorney's fees and costs in the event of a default. As the prevailing party on appeal and pursuant to the terms of these agreements, Valley Oaks is entitled to its reasonable fees and costs on appeal upon its compliance with ARCAP 21.
CONCLUSION
¶30 For the foregoing reasons, we affirm the superior court's judgment.