In a recent Washington State Court of Appeals case, a developer of a residential subdivision built sewer facilities to serve its project, and was entitled to latecomer fees for building more than what it required. Other developers, who received the benefit of the sewer facilities, would be required to pay latecomer fees to reimburse the original developer for their fair share of the facilities serving their projects.

The original developer lost the project in a foreclosure, and once the lender acquired the property, it sought a judicial determination that it was also entitled to the latecomer fees that its delinquent borrower would have been entitled to. But according to the court, this would have been the case only if the lender’s security interest in the property included the right to latecomer fees. Thus, it became important to determine what interest the lender acquired in the property (e.g., collateral) as described in its deed of trust.

Ultimately, the court found that the sewer facilities themselves were not collateral because they did not exist at the time the borrower executed the deed of trust, and additionally, the borrower was required to and did convey the facilities to the sewer district before the foreclosure. Second, the right to receive latecomer fees was not part of the collateral under the language of the deed of trust because it was a right related to sewer facilities owned by a sewer district, and not related to the development property itself. Accordingly, when the lender acquired the project in foreclosure, it was not entitled to latecomer fees. This result might have been avoided if the collateral had not been defined generally as “all rights relating to the property.” Instead, the lender’s position might have been improved if it had specifically identified latecomer fees as part of the collateral. To read Washington Federal Savings and Loan Association v. The McNaughton Group, et al, issued February 3, 2014, click here.