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From the desk of Gordon C. Klug:
Absent a contract, statute, or recognized rule of equity, in disputes involving title to real property, attorneys’ fees are not generally awarded. However, in situations involving lis pendens (or a statutory claim against real property) Washington courts have not set forth criteria to aid in determining whether an action “affects” title to real property. This makes it difficult for a party to determine if there is potential for costly attorneys’ fees down the line. The Division II Court of Appeals in 134th Street Lofts vs. iCap Northwest provides guidance in addressing this issue amidst its review of a trial court’s grant of summary judgment and subsequent award of attorneys’ fees for the defendant party.
The Washington Court of Appeals held that if a claim brought for a statutory claim against real property (otherwise known as lis pendens) does not affect the rights incident to title to real property, the court may then award attorney fees pursuant to the defending party. This includes fees the prevailing party incurred in canceling the lis pendens.
134th Street Lofts, LLC. v. iCap Northwest Opportunity Fund, LLC., and iCap Pacific NW Management, LLC., 15 Wn. App. P.2d 549 (September 29, 2020).
This case arises on appeals from various orders on partial summary judgment from a trial court ruling based on a contract dispute between a developer, 134th Street Lofts, LLC (134th Street Lofts), and manager iCap Northwest Opportunity Fund (iCap) over an agreement to develop a parcel of property located in Clark County, Washington.
134th Street Lofts filed a lawsuit, alleging that iCap breached its contract by violating its duty of good faith and fair dealing by failing to remove its own subordinate deed of trust on the property for several weeks, causing multiple contractors to leave the jobsite after not being paid due to the senior lender, Parkview Financial, refusing to disburse funds until iCap removed its subordinate deed of trust. Shortly after filing this complaint, 134th Street Lofts recorded a lis pendens on the property which caused iCap to lose its replacement lender of the loan and was required to pay substantial fees to procure a one-month extension on the due date of an original loan.
iCap moved to cancel the lis pendens, arguing that it was improper because 134th Street Lofts’ claims did not affect title to real property. The trial court granted iCap’s motion and also informed iCap that it had the right to move for damages, costs, and fees. Shortly thereafter, iCap moved for partial summary judgement, arguing that it did not breach the duty of good faith and fair dealing, and also filed a motion for summary judgement on damages and fees related to the lis pendens. The trial court granted iCap’s motions and ordered 134th Street Lofts to pay iCap for damages, attorney fees, and costs. 134th Street Lofts then appealed these orders.
Under RCW 4.28.320, a party in an action affecting title to real property may file a notice, or lis pendens, notifying prospective purchasers and lenders of the property of the pendency of the action. Revised Code of Washington 4.28.328 also provided for a “prevailing party” to recover actual damages caused by the filing of a lis pendens, including reasonable attorneys’ fees. However, Washington courts never did set forth specific guiding criteria to answer the question whether an action “affects title to real property” under RCW 4.28.328(2). Here, in ruling on this question, the Appellate Court was guided by its previous decision in a case involving a lis pendens filed in an easement dispute. This earlier ruling based its opinion on an out of state opinion from an Arizona appellate court. Arizona courts have similar lis pendens proceedings and also have experience ascertaining whether an action “affects title to real property” when determining whether a lis pendens was wrongfully recorded.
In turning to its own previous adoption of law from the Arizona courts’ construction of Arizona’s lis pendens statute, the Washington Appellate Court concluded that an action affects title to real property “when it involves an adjudication of rights incident to title to real property.” In evaluating whether a lawsuit affects right incident to title, the Appellate Court again turned to Arizona case law, which provides that if any judgment “alters or encumbers upon a property owner’s rights as bestowed by the title in question, then the action affects these rights incident to title to real property.”
While addressing the “bad faith” aspect of the parties’ conduct in this case, the Court of Appeals recognized the legal principle of an implied duty of good faith and fair dealing that exists in every contract. This duty obligates both parties to a contract to cooperate with one another so that each party may obtain the full benefit of the subject contract. However, this duty only arises in relation to performanc
e, and it cannot add or contradict a contract’s express terms. Consequently, a party is not obligated to accept a material change of contract terms to avoid breach of the duty of good faith.
In this case, 134th Street Lofts argued that the trial court wrongly imposed attorney fees because the action affected title to real property, and that summary judgment was improper because iCap breached the duty of good faith and fair dealing, preventing each party form enjoying the benefit of performance when iCap did not immediately remove its deed of trust held on the property upon 134th Street Lofts’ request. However, 134th Street Lofts failed to realize that there is a critical distinction between “control over the entity” and “title to the property.” Regardless of the outcome of the lawsuit pertaining to the management of the project, the rights as title owner are unaffected, as the trial court’s judgment didn’t bind future owners of the property or govern any rights intrinsically tied to the ownership of the property. The Court added that since 134th Street Lofts and iCap were “merely managers” and developers acting as agents on behalf of the true owner of the property. Thus, the action did not affect title to real property. Furthermore, 134th Street Lofts’ contention that iCap breached its duty of good faith and fair dealing would improperly impose a material change to the existing terms of the contract agreement between the two parties and would create new obligations beyond those contained within the contract. As 134th Street Lofts could not show that it was denied the benefit of iCap’s performance under the existing contract agreement, iCap did not breach its implied duty of good faith and fair dealing. Ultimately, the Washington Court of Appeals held that the trial court did not err in its rulings and awarding iCap attorney fees.
The Big Picture:
Attorney fees can add up to a costly amount of damages that the non-prevailing party has to pay. When deciding whether to bring an action against another for what the party believes to be a breach of good faith and fair dealing, its best to analyze the subject contract under significant scrutiny in order to avoid incurring an even larger amount of monetary loss.