IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
UNION BANK, N.A., )
) No. 72606-4-1 CZ2
Respondent, ) f
) DIVISION ONE
v. ) i A
)
DANIEL GLAEFKE, ) UNPUBLISHED OPINION
) O
Appellant. ) FILED: Januarv 19. 2016 ro
Spearman, C.J. — Danial Glaefke executed a deed of trust on his home in
favor of Union Bank, N.A., (Union Bank) to secure a loan. While the loan amount
was still outstanding, the deed of trust was mistakenly reconveyed. Before the
error was discovered, however, Glaefke filed for Chapter 7 bankruptcy. Union
Bank filed a motion for relief from stay to foreclose on the deed of trust. When
Union Bank discovered the error, it brought an action to rescind the
reconveyance and reinstate the deed of trust. The trial court granted summary
judgment in favor of Union Bank. Glaefke appeals, arguing that Union Bank's
claim was discharged in bankruptcy. We affirm the trial court's order granting
summary judgment, rescinding the reconveyance and reinstating the deed of
trust.
No. 72606-4-1/2
FACTS
Danial Glaefke purchased real property located at 16341 Inglewood Place
NE, Bothell, WA 98020 (Property) in August of 1989. On December 10, 2006
Glaefke executed a Promissory Note (Note) in the amount of $61,000 in favor of
Frontier Bank. Union Bank was the successor in interest to Frontier Bank. The
Note was secured by a deed of trust (Deed of Trust) for the Property recorded on
February 8, 2008.
On January 24, 2012, a full reconveyance of the Deed of Trust was
recorded in error. No explanation was given for the error nor the timing and
circumstances of its discovery.1 At the time the reconveyance was recorded,
Glaefke owed approximately $41,061.80 in unpaid principal.
On March 12, 2013, Glaefke filed for Chapter 7 bankruptcy. Union Bank
was listed as a secured creditor. Union Bank moved for relief from the automatic
stay and was granted relief to foreclose upon the Property.
On June 26, 2013, Glaefke's debts were discharged. At some point Union
Bank discovered that its Deed of Trust had been mistakenly reconveyed. Union
Bank filed its Complaint for Rescission of Deed of Reconveyance and
Reinstatement of Deed of Trust on April 10, 2014. Glaefke and Union Bank filed
cross-motions for summary judgment. The trial court denied Glaekfe's motion
and granted Union Bank's motion, entering a judgment that reinstated the Deed
11t is not discernible from the record how the reconveyance came to be recorded or the
circumstances surrounding Union Bank's discovery of the recordation. It appears undisputed that
Glaefke was also unaware of the recording of the reconveyance.
No. 72606-4-1/3
of Trust "to the same valid priority lien position on the Property, upon the same
terms that the deed of trust enjoyed before the Reconveyance." Clerk's Papers
(CP) at 252. Glaefke appeals.
DISCUSSION
Whether a trial court's grant of summary judgment is proper is a question
of law we review de novo. Hertog, ex rel. S.A.H. v. City of Seattle, 138 Wn.2d
265, 275, 979 P.2d 400 (1999) (citing Taqqart v. State, 118Wn.2d 195, 199, 822
P.2d 243 (1992); CR 56(c)). We engage in the same inquiry as the trial court,
construing all facts and reasonable inferences from the facts in the light most
favorable to the nonmoving party, id. Whether a creditor's claim for equitable
relief is discharged in bankruptcy is also a question of law that we review de
novo. Crafts v. Pitts. 161 Wn.2d 16, 22, 162 P.3d 382 (2007).
Glaefke argues that the trial court erred when it failed to dismiss Union
Bank's complaint. He does not dispute that the reconveyance of the Deed of
Trust, releasing Union Bank's security interest in the property at issue, was
inadvertent. And he concedes that generally, equitable principles allow a party to
reinstate an inadvertently released security interest. But he claims the intervening
bankruptcy proceeding, following the inadvertent reconveyance, discharged
Union Bank's claim for reinstatement and rescission of the Deed of Trust.
In support of the argument, Glaefke cites 11 U.S.C. § 727(b), which
provides that a discharge in a Chapter 7 bankruptcy "discharge^] the debtor from
all debts that arose before the date of the order for relief under this chapter...,"
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except as provided in section 523.2 And he notes it is undisputed that Union
Bank's claims arose prior to the filing of his bankruptcy petition. Glaefke then
points out that 11 U.S.C. §101(12), defines "debt" as "liability on a claim" and that
a "claim" is broadly defined to mean:
(A) right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or
(B) right to an equitable remedy for breach of performance if such
breach gives rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. § 101(5). Glaefke argues that Union Bank's rescission and
reinstatement action is a right to payment within the meaning of Section
101(5)(A) because reinstating the Deed of Trust provides "Union Bank
with the right to foreclosure and as such the right to payment in the form of
proceeds from the sale of the Property." Brief of Appellant at 6.
Accordingly, Glaefke argues that under 11 U.S.C. § 727(b), Union Bank's
rescission and reinstatement action was discharged as a claim that
existed prior to the bankruptcy petition.
Glaefke is correct that the term "claim" as used in 11 U.S.C. 101(5), is
given the "'broadest possible definition'" to ensure that "'all legal obligations of
the debtor, no matter how remote or contingent, will be able to be dealt with in
the bankruptcy case.'" In re Hexcel Corp., 239 B.R. 564, (Bankr. N.D. Cal. 1999)
2 11 U.S.C. § 523 contains a number of exceptions to discharge, none of which the
parties' claim apply to this case.
No. 72606-4-1/5
(quoting H.R. Rep. No. 95-595 (1977)). But his argument that Union Bank's claim
for rescission and reinstatement of the Deed of Trust falls within that definition
fails because it conflates Union Bank's right to foreclose on the Deed of Trust
with its right to equitable relief.
The case upon which Glaefke principally relies, Johnson v. Home State
Bank, 501 U.S. 78, 111 S. Ct2150, 115 L Ed. 2d 66 (1991) does not support his
argument that the equitable relief Union Bank seeks is a right to payment.
Instead, that case simply affirms the unremarkable proposition that a mortgage
interest which survives bankruptcy is still a claim because the mortgage holder
retains a right to payment in the form of proceeds from a foreclosure sale.
In Johnson, the debtor defaulted on promissory notes secured with a
mortgage on his farm. When the bank that held the note began foreclosure
proceedings, Johnson filed for liquidation under Chapter 7 of the Bankruptcy
Code and the Bankruptcy Court subsequently discharged him from personal
liability on the notes. However, the bank's right to foreclose on the property
survived the bankruptcy under 11 U.S.C. § 522(c)(2). The bank reinitiated
foreclosure proceedings in the state court, which entered judgment for the bank.
But before the foreclosure sale could take place, Johnson filed for reorganization
under Chapter 13 of the Bankruptcy Code and listed the mortgage as a claim
against his estate. The bankruptcy court confirmed Johnson's plan to pay the
bank's judgment, but the Court of Appeals held that the Bankruptcy Code
prohibited Johnson from including a mortgage obligation in a Chapter 13 plan if
No. 72606-4-1/6
his personal liability on the obligation had been discharged in a Chapter 7
proceeding.
On appeal, the Supreme Court framed the issue as "whether a mortgage
lien that secures an obligation for which a debtor's personal liability has been
discharged in a Chapter 7 liquidation is a 'claim' subject to inclusion in an
approved Chapter 13 reorganization plan." Johnson, at 82. The court concluded
that it was, stating that "[ejven after the debtor's personal obligations have been
extinguished, the mortgage holder still retains a 'right to payment' in the form of
its right to the proceeds from the sale of the debtor's property." Johnson, at 84.
The Court further observed that "[alternatively, the creditor's surviving right to
foreclose on the mortgage can be viewed as a 'right to an equitable remedy' for
the debtor's default on the underlying obligation." jd. Thus, the Court held that
regardless of whether analyzed under 11 U.S.C. 101(5)(A) or(B), "[ejither way,
there can be no doubt that the surviving mortgage interest corresponds to an
'enforceable obligation' of the debtor." Id.
Johnson is of no help to Glaefke because the claim Union Bank asserts
here is not a "right to payment" under subsection 101(5)(A) nor a "right to an
equitable remedy" under subsection 101(5)(B). It is not a right to payment
because at this juncture, Union Bank does not seek payment in the form of
proceeds from a foreclosure sale, instead it seeks only to be put back into the
position it would have held but for the undisputed mistaken reconveyance. Union
Bank's claim for rescission and reinstatement do not fall within subsection
101(5)(B) because Union Bank's right to this equitable remedy did not arise from
No. 72606-4-1/7
"the debtor's default on the underlying obligation." Johnson, at 84. Union Bank's
right to equitable relief does not arise from Glaefke's default, but instead from its
own conduct in mistakenly reconveying the Deed of Trust.
The facts of this case are more like those in In re Irizarry, 171 B.R. 874
(9th Cir. BAP 1994). In that case, the debtor received real property via a grant
deed from the decedent. The decedent's heirs filed a lawsuit to rescind the deed
and the debtor filed Chapter 7 bankruptcy, listing the property as an asset and
the heirs as unsecured creditors. The debtor was discharged and the heirs filed
to cancel the deed and reconvey the property. The bankruptcy court granted
summary judgment to the heirs. On appeal, the bankruptcy appellate panel
affirmed. It found that the discharge did not prevent a prepetition state court
action seeking equitable remedies such as cancellation of the deed,
reconveyance of the property or cancellation of liens.
The Irizarry court first concluded that because the heirs sought equitable
remedies and not money damages, a judgment in their favor would not constitute
a right to payment under subsection 101(5)(A). 171 B.R. at 878. It reached the
same result under subsection 101(5)(B) because the heirs sought equitable relief
on the grounds that the decedent did not have the requisite mental capacity to
execute the grant deed transferring the property to the debtor. The court held that
"the equitable remedies do not constitute claims as defined in § 101(5)(B), since
these remedies do not arise from a breach of performance and do not give rise to
a right to payment." Id. Similarly, in this case, because Union Bank seeks an
equitable remedy that is not money damages and does not arise from Glaefke's
No. 72606-4-1/8
failure to perform, it is neither a right to payment nor a right to an equitable
remedy for breach of performance.
Glaefke contends that Irizarry is distinguishable because the petitioners
there sought reconveyance of the property, but did not, as Union Bank does
here, seek to reinstate a deed of trust with its concurrent right to foreclose on the
property. But the Irizarry court expressly considered that a judgment awarding
equitable relief could give rise to a later contingent right to payment if the debtor
failed to perform, but only if an additional breach were to occur. Id. at 878-79.
Similarly, here, once the Deed of Trust has been reinstated, Union Bank may
bring an action to foreclose that would give rise to a right to payment, but that
right arises from Glaefke's failure to make payments on the Note. It is unrelated
to the basis for Union Bank's claim for equitable relief which arose from its own
mistake.3
We hold that because Union Bank's equitable action for rescission and
reinstatement of the Deed of Trust was not a debt as that term is defined in the
Bankruptcy Code, it was not discharged as a result of Glaefke's bankruptcy
3 In any event it is undisputed that the right to foreclose on the property survives the
bankruptcy proceeding. Principles of equity dictate that once the deed of trust is reinstated that
right remains intact. Otherwise, Union Bank's mistake would unjustly deprive it of its interest in
the property and Glaefke would be the beneficiary of a windfall to which he was not entitled and
for which he did nothing to earn. See, Kinne v. Kinne. 27 Wn. App. 158, 162, 617 P.2d 442 (1980)
(quoting Scvmanski v. Dufault, 80 Wn.2d 77, 491 P.2d 1050 (1971)), an equitable lien or
constructive trust may properly be found "despite the absence of fraud or wrongdoing, when
property is acquired under circumstances such that the holder of legal title would be unjustly
enriched at the expense of another party at interest.")
No. 72606-4-1/9
proceeding. The trial court did not err in granting Union Bank's motion for
summary judgment on its claim.
Affirm.
C Of
WE CONCUR:
T.