## Facts

- Nelson & Gale, Inc. developed a hotel and later formed a spin-off entity, Nelco Enterprises, Inc. (Nelco).
- In 1977, Nelco and several Nelco shareholders signed two promissory notes to finance the hotel, secured by a deed of trust on the property.
- The notes were held by First Interstate Bank of Washington, N.A., and Washington Mutual Savings Bank (together, the Banks).
- Nelco defaulted on the notes in 1982.
- To avoid foreclosure, Western Frontiers, Inc. and Magnuson Limited Partnership (together, the Joint Venture) agreed to buy the hotel from Nelco under a 1982 real-estate contract.
- The 1982 contract required the Joint Venture to make installment payments until 1985, then make two balloon payments intended to cover the remaining balances on the notes.
- A supplemental 1982 agreement gave the Joint Venture an option to assume the loan obligations instead of making the balloon payments.
- In 1983, before any balloon payments came due, the Joint Venture sold the hotel to Henry Taylor and Richland Associates (together, Richland).
- Nelco consented to the 1983 sale on the condition that the shareholders’ remaining equity in the notes would be paid in full.
- Richland agreed to assume the notes, and the Banks approved Richland’s assumption.
- Nelco signed a letter stating that the 1982 contracts between Nelco and the Joint Venture had been “satisfied.”
- Richland later defaulted, and the Banks foreclosed under the deed of trust and sought a deficiency judgment against Nelco, the shareholders, the Joint Venture, and Richland.
- The trial court entered judgment for the Banks and also required the Joint Venture to indemnify the Nelco shareholders on the theory that the Joint Venture had assumed the notes.

## Issues

1. Whether the Nelco shareholders proved by clear, cogent, and convincing evidence that the Joint Venture assumed liability on the promissory notes, creating an indemnity obligation to the shareholders.

## Decision

- The Court of Appeals reversed the portion of the judgment requiring the Joint Venture to indemnify the shareholders.
- The court held the shareholders did not prove, by clear, cogent, and convincing evidence, that the Joint Venture assumed the promissory note obligations.
- The court left undisturbed the trial court’s judgment in favor of the Banks on foreclosure and the deficiency because that portion was not the subject of the Joint Venture’s appeal.

## Legal Principles

- A claimed assumption of another’s debt (functionally similar to a substitution of obligors) must be proved by clear, cogent, and convincing evidence.
- Payment terms in a purchase-and-sale arrangement that track the amounts due on underlying notes may reflect a pricing and performance structure, not a promise to become personally liable on the lender’s notes.
- An option to assume debt does not establish assumption unless the evidence shows the option was clearly exercised and the assuming party agreed to be bound on the debt.
- Subsequent transactions with an express assumption approved by the lender, along with written acknowledgments that earlier contracts were “satisfied,” can weigh against finding a prior, unstated assumption.
- When the writings and surrounding facts are at least as consistent with no assumption as with assumption, the heightened standard is not met and indemnity cannot be imposed.

## Conclusion

Because the 1982 sale documents and later conduct did not clearly show that the Joint Venture became personally liable on the Banks’ notes, the shareholders failed to prove an assumption by clear, cogent, and convincing evidence, and the Court of Appeals reversed the trial court’s indemnity order against the Joint Venture.


First Interstate Bank of Washington v. Nelco, 822 P.2d 1260 (1992)