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Bank Liable for Attorneys’ Fees for “Prelitigation Bad Faith” Says Washington Court of Appeals

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In a recent decision, the Washington Court of Appeals established a new equitable exception to the American rule for attorneys’ fees, which generally denies an award of fees and costs to a prevailing party absent a contractual or statutory basis. In Dalton M, LLC v. North Cascade Trustee Services, the Court of Appeals held a Lender liable for a property owner’s attorneys’ fees when the Lender refused to timely release its lien, despite repeated requests from the property owner. Notably, the Court of Appeals held the Lender liable even though there was no contractual attorneys’ fee provision between the Lender and the property owner or a statute providing for the award. The case represents an important change in Washington law and presents a cautionary tale for lenders and their attorneys both in understanding their collateral and in promptly responding to legitimate requests to remove liens on property.

In 2006, the defendant Lender made a loan secured by two adjacent parcels, Parcel 0402 and Parcel 9008. After originating the loan, the borrowers failed to pay taxes on Parcel 0402, while continuing to pay taxes on Parcel 9008. As a result, the county foreclosed its tax lien and held a tax foreclosure sale on Parcel 0402, foreclosing out the Lender’s interest and selling the property to the Plaintiff.

Following the tax sale of Parcel 0402, the borrowers, who originally owned the property, defaulted on their loan and the Lender proceeded to foreclose its deed of trust. However, when the Lender commenced its foreclosure, it erroneously included Parcel 0402, which was now owned by the Plaintiff. Despite Plaintiff’s ownership appearing in multiple title reports obtained by the Lender and its counsel, the Lender failed to name the Plaintiff in its foreclosure lawsuit.

Upon learning of the Lender’s foreclosure sale, the Plaintiff contacted the Lender to rectify the problem. Although the Lender assured the Plaintiff that it was trying to resolve the issue, the Lender never took the necessary steps to release its lien. After more than one year of unsuccessful attempts—including numerous phone calls and emails to the Lender’s representatives and attorneys—the Plaintiff filed suit. Ruling in the Plaintiff’s favor, the trial court entered an order quieting title and a judgment for slander of title, awarding attorneys’ fees on both claims.

The Court of Appeals reversed the trial court’s judgment for slander of title and determined that the trial court improperly awarded attorney’s fees for the quiet title judgment. However, the Court of Appeals did not let the Plaintiff go home empty-handed. Establishing an equitable exception to the American rule, the Court of Appeals determined that the Plaintiff was entitled to recover the costs of litigation resulting from the Lender’s “prelitigation bad faith,” even though the Plaintiff did not raise the claim in its complaint. Clearly, the Court of Appeals was disturbed by the Lender’s conduct, noting the Lender “diddled and dawdled” and “took no steps, let alone reasonable steps, to clear title.” This sentiment was echoed in a concurring opinion, which described the Lender, and other similar institutions, as “too big to care.”

The decision is important because it clarifies an unsettled legal area concerning the ability of a plaintiff to recover costs of litigation. But the decision is especially significant to large financial institutions because it takes aim at the obstacles customers face while navigating a lender’s bureaucracy to address a problem, such as when a lender’s representatives lack authority or knowledge of proper procedures to resolve the customer’s complaint.

It remains to be seen whether the Lender will appeal the decision. But barring reversal by the Washington Supreme Court, there may now be a legal basis in Washington to recover fees for lawsuits brought to enforce indisputable rights that were previously ignored.