Plein v. Lackey

Brief Fact Summary.

A president of a corporation and his attorney, sought review of a decision of the Court of Appeals, which reversed the trial court’s grant of summary judgment in favor of the president and attorney. The Court of Appeals granted the plaintiff a permanent injunction barring a foreclosure sale and a declaration that a deed of trust assigned to the president was void.

Synopsis of Rule of Law.

“Accommodation party” status is given when the party received no direct benefit from the proceeds of the instrument and when the loan would not have been made unless the party signed the instrument.

Facts.

In 1997, Paul Plein, Bruce White, and Lee Cameron formed Alpen Group Inc. to buy and sell real estate. In April 1997, Alpen purchased a lot from Sunset Investments, issuing a promise note for $75,000 to Sunset. The note was secured by a deed of trust naming Sunset as the beneficiary and Alpen as the grantor. Alpen also borrowed $136,500 from Columbia State Bank, executing a promissory note also secured by a deed of trust. Columbia loaned the money on the condition that Sunset’s agreement would become subordinate to Columbia’s interests. Lee Cameron then advanced Alpen $30,000. The parties then stated that the plaintiff, Paul Plein (the “plaintiff”), issued deeds of trust against the log home being built on the lot to secure a debt to trade creditors. Cameron then became president of Alpen and Alpen issued a promissory note for the $30,000 that Cameron advanced. The plaintiff then received a judgment against Alpen in the amount of $45,000. The order of the creditors then became (1) Columbia, (2) Sunset, (2) the unpaid trade creditors, (4) Cameron, and (5) the plaintiff.

In 1998, the note to Columbia came due and Cameron paid the amount due from his personal funds and Columbia endorsed the note to Cameron. Then, in December 1998, Cameron paid the amount due Sunset and, like Columbia, Sunset endorsed the note to Cameron. Cameron then held the two superior deeds of trust as well as his interest that was junior to all others except for the plaintiff. In October 1999, Cameron, as assignee of the Sunset note, hired an attorney, Chester Lackey (the “defendant”), to being nonjudicial foreclosure proceedings as a result of Alpen’s default on the Sunset note. All the creditors were informed that the sale of the property would occur on March 31, 2000.

In February 2000, Plein and the trade creditors filed suit seeking a permanent injunction barring the sale and that the deed of trust was void because the underlying debt had been paid. On March 28, the plaintiff filed a Motion for Summary Judgment claiming that the facts showed that Cameron paid off the Sunset note on behalf of Alpen, thus extinguishing the debt. The plaintiff further claimed that he was entitled to an order declaring that his and the trade creditors security interests were superior to Cameron’s and that the foreclosure proceedings were void. The sale proceeded as scheduled and Cameron purchased the property for an amount that was the approximate total of the Columbia, Sunset, and Cameron notes.

In May 2000, Cameron filed a cross motion for Summary Judgment arguing that Cameron, for his personal benefit, purchased the Sunset and Columbia notes and obtained valid assignments of the promissory notes and deeds of trusts, rather than for the benefit of Alpen. Cameron also claimed that the plaintiff failed to make a timely objection to the sale. The trial court granted Cameron’s summary judgment and dismissed the plaintiff’s complaint. The Court of Appeals reversed. Cameron petitioned for review claiming that he signed the Sunset note as an accommodation party, and that as such he had the right, once he paid the note, to enforce the instrument against Alpen to foreclose the deed of trust.

Issue.

Is Cameron considered an accommodation party for the purposes of foreclosing on the deed of trust?

Held.

Yes. The court looks to UCC Section: 3-419(1) which provides that: “if an instrument is issued for value given for the benefit of a party to the instrument (“accommodated party”) and another party to the instrument (“accommodation party”) signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party “for accommodation.” The court states that the direct beneficiary of the loan was Alpen and any benefit received by Cameron was a derivative and indirect result of him being a stockholder in the corporation. The court notes that another factor that serves to establish accommodation party status is that the lender would not have made the loan in the absence of the party’s signature on the note giving rise to liability. The court cites 11AM.JUR.2D Bills and Notes Section: 85 (2002) and states that “two primary factors that indicate accommodation party status are that the party received no direct benefit from the proceeds of the instrument and that the loan would not have been made unless the party signed the instrument.” The defendant conceded to the fact that the loan would have not have been made unless the individual stockholders were subject to personal liability on the note thus supporting the court’s decision.

Discussion.

Cameron relies on RCW 62A.3-419 to make his argument. Comment 1 to section .3-410 gives and example of accommodation party status similar to this case: “If X cosigns a note of Corporation that is given for a loan to Corporation, X is an accommodation party if no part of the loan was paid to X or for X’s direct benefit. This is true even though X may receive indirect benefit from the loan because X is employed by Corporation or is a stockholder of Corporation, or even if X is the sole stockholder so long as Corporation and X are recognized as separate entities.”