FILED: May 4, 2011

IN THE COURT OF APPEALS OF THE STATE OF OREGON

WASHINGTON MUTUAL BANK,

Plaintiff,

and

JP MORGAN CHASE BANK,
a national association,

Plaintiff-Respondent,

v.

KURT E. FREITAG
and RITA H. SCHAEFER,

Defendants-Appellants,

and

LINCOLN COUNTY, et al,

Defendants.

Lincoln County Circuit Court
070387, 070388
A142630 (Control)
A142631

Sheryl Bachart, Judge.

Argued and submitted on February 17, 2011.

John E. Pollino argued the cause for appellants. With him on the briefs was Garrett Hemann Robertson P.C.

Robert C. Dougherty argued the cause and filed the brief for respondent.

Before Schuman, Presiding Judge, and Wollheim, Judge, and Nakamoto, Judge.

NAKAMOTO, J.

Affirmed.

NAKAMOTO, J.

Plaintiff Washington Mutual Bank(1) filed these consolidated actions to foreclose on trust deeds to two coastal properties owned by defendants. In response, defendants asserted affirmative defenses and counterclaims based on the bank's alleged breach of contract, breach of fiduciary duty, and violation of various federal statutes. The trial court granted the bank's motion for summary judgment as to all but one issue--a factual dispute concerning credits for hazard insurance charges that were applied to the balance on the loans; after a bench trial, the court ruled in the bank's favor on that issue as well. The court then entered a judgment foreclosing on the trust deeds and a supplemental judgment awarding attorney fees. Defendants appeal both judgments. We affirm.

Defendants' first assignment of error concerns the trial court's grant of Washington Mutual's motion for summary judgment. We state the facts pertaining to that assignment in the light most favorable to defendants, giving them the benefit of all reasonable inferences that can be drawn from those facts. Bergmann v. Hutton, 337 Or 596, 599, 101 P3d 353 (2004).

In the summer of 1997, defendants applied for loans from Washington Mutual to construct single family homes on two adjoining lots in Newport, Oregon. Defendants filled out "Master Loan Applications" and "Uniform Residential Loan Applications" on which they checked boxes stating that the properties would be "investment" as opposed to "primary residence" or "secondary residence." Defendants listed five real estate holdings: a residence in Illinois; a residence in Arizona; rental property at "6855 Gladys"; and the two lots in Newport. Washington Mutual approved the applications and issued loan commitment letters.

Defendants subsequently entered into loan agreements with the bank for construction and permanent financing, subject to the conditions set out in the loan commitment letters. Defendants signed promissory notes for the loans, one in the amount of $291,650 and another in the amount of $269,800, and the loans were each secured by separate deeds of trust. As relevant to this assignment of error, paragraph 6 of the trust deeds provided, in part, that

"Borrower shall occupy, establish, and use the Property as Borrower's principal residence within sixty days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing * * *."

At the same time, however, defendants executed various "riders" to the trust deeds. One of those riders, the "1-4 Family Rider," eliminated the standard obligation to occupy the property as a primary residence. The 1-4 Family Rider provided, "Unless Lender and Borrower otherwise agree in writing, the first sentence in Uniform Covenant 6 concerning Borrower's occupancy of the Property is deleted."(2) The rider also assigned to Washington Mutual all rents from the property, but provided that defendants would receive any such rents so long as they were not in default on the loan.

Construction on the homes was completed in late 1998. At the conclusion of construction, a dispute arose between defendants and the bank regarding the last $10,000 in loan proceeds. Under the terms of the construction loans and accompanying documents,(3) all loan proceeds--with the exception of the final disbursement--were to be disbursed by checks made payable to defendants' general contractor. The last disbursement under both loans, however, was to be made by check "payable to all parties."

Upon receiving a final certificate of completion of construction for the homes, Washington Mutual issued two final checks, each in the amount of $5,000, that, pursuant to the parties' agreement, were made payable jointly to defendants and their contractor. As it turned out, the contractor negotiated the checks at the Bank of Newport without first obtaining defendants' endorsement. Defendants then objected to payment of the checks, and the disbursements were eventually credited back to the loan accounts. Nonetheless, the payment mishap spawned a protracted dispute between defendants and Washington Mutual regarding interest, adjustments, and payments due on the loans.

During the course of the parties' dispute, no later than in 2000, defendants stopped making loan payments. As a result, Washington Mutual filed these actions to foreclose on the trust deeds. In their answer, defendants denied that the bank was entitled to foreclose on the trust deeds and asserted affirmative defenses and counterclaims. Defendants' affirmative defenses and counterclaims were based, in part, on allegations that Washington Mutual had violated the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) by improperly disbursing the final payments and by "force-placing insurance" on the properties--i.e., by obtaining insurance coverage for the properties and then charging defendants for the premiums. Defendants further argued that, in addition to violating federal law, the improper disbursements and force-placing of insurance were material breaches of the loan agreements that excused defendants' performance of those agreements.

Washington Mutual moved for summary judgment on all claims and defenses, arguing that defendants had indisputably defaulted on their loan obligations and that, because the loans were made for investment purposes (as defendants represented in the loan applications), neither TILA nor RESPA applied. The bank further argued that, even if TILA and RESPA applied to the loans, any defenses or claims for recoupment based on those laws were untimely. Finally, the bank argued that defendants were unable to present any evidence that the bank had materially breached the loan agreements.

In an affidavit submitted in opposition to the bank's motion, defendant Kurt Freitag averred, among other things:

"As required by the provision of the Deed of Trust which [defendant] Rita Schaefer and I executed which incorporates the Adjustable Rate Riders, and 1-4 Family Rider Assignment of Rents, we were required to reside in the premises within sixty days of the completion of construction. My wife and I have used one or the other of the premises as a secondary personal residence 15-20% of each calendar year since completion of the construction of the property in late 1998, representing between 55 and 75 days residence each year at one or the other of the premises. The remainder of the time available, we rent the premises as vacation rentals."

Based on that affidavit, as well as the occupancy provision of the deeds of trust and the riders thereto, defendants argued that the "extension of credit for a personal residence which is also an investment specifically makes the requirements and provisions of the Truth in Lending Act and RESPA applicable to this transaction."

The trial court agreed with the bank.(4) It ruled that the loans were made for business purposes and that TILA and RESPA were therefore inapplicable; for that reason, the court did not reach the timeliness or merits of any alleged TILA and RESPA violations. The court also concluded that defendants had not established, and the bank had not breached, any fiduciary duty owed to them, a ruling that defendants do not challenge on appeal, and, further, that the bank had not breached the terms of the parties' agreements. Except as to one issue, the trial court granted the motion for summary judgment.(5)

On appeal, defendants contend that the trial court's grant of summary judgment was erroneous for two reasons. First, defendants contend that there are genuine issues of fact regarding their affirmative defenses and counterclaims based on TILA and RESPA violations, including (1) whether the loans were for business or consumer purposes, which determines whether those laws apply; (2) whether the bank indeed violated TILA and RESPA; and (3) whether recoupment claims based on TILA and RESPA are time barred. Second, and alternatively, defendants argue that, even if their TILA and RESPA defenses and counterclaims fail, there is a question of fact as to whether the bank nevertheless materially breached its obligations under the loan agreements, thereby excusing defendants' performance.

We begin with defendants' contention that their affirmative defenses and counterclaims based on TILA and RESPA should have survived summary judgment. Those federal laws protect consumers in the context of credit transactions. See 15 USC