First Interstate Bank of Washington v. Nelco

Nelson & Gale, Inc., and a spin-off company, Nelco Enterprises, Inc. (Nelco) (defendant), obtained a loan to build a hotel. In 1977, Nelco and several of its shareholders (defendants) signed two promissory notes for the loan, secured by a deed of trust on the hotel. In 1982, Nelco defaulted. Western Frontiers, Inc., and Magnuson Limited Partnership (collectively, the joint venture) (defendant) agreed to buy the hotel. The first sales contract between Nelco and the joint venture provided that the joint venture would make installment payments until 1985, at which time the joint venture would make two balloon payments covering the remaining balance on the notes. A supplemental sales contract gave the joint venture the option of assuming the loan obligations rather than making the balloon payments. However, in 1983, the joint venture sold the hotel to Henry Taylor and Richland Associates (collectively, Richland Associates) (defendant). Nelco consented to the sale on the condition that its shareholders’ remaining equity in the notes would be paid in full. Richland Associates agreed to assume the notes. Nelco signed a letter stating that the 1982 contracts had been satisfied. Richland Associates’ assumption was approved by the banks that held the notes: First Interstate Bank of Washington, N.A., and Washington Mutual Savings Bank (collectively, the banks) (plaintiffs). Later, Richland Associates defaulted. The banks brought a foreclosure action and sought a deficiency judgment against Nelco, the shareholders, the joint venture, and Richland Associates. The trial court found in favor of the banks. However, the court also ordered the joint venture to indemnify the shareholders on the logic that the joint venture had assumed the notes. The joint venture appealed, arguing that the shareholders had failed to prove the assumption by the requisite standard of clear, cogent, and convincing evidence.